Apple stock rise could have meant $4.5 billion for Microsoft

In 1997, Microsoft made a $150 million investment in "beleaguered" Apple. …

Apple reached a major milestone Wednesday when the company's market capitalization surpassed that of Microsoft for the first time since 1990, making it the number one technology company by market cap. In the last several years, Apple has been firing on all cylinders with the launch of the iPhone and iPad while growing its Mac business to record sales. Apple's meteoric rise in stock value over the last couple years put its market cap ahead of Microsoft, whose stock has been slipping recently. Apple's good fortune could have been good for Microsoft's balance sheet, however; the software giant could have made almost $5 billion in profit had it held on to its AAPL stock for a little longer.

Microsoft's market cap rose sharply throughout the 1990s, peaking at around $556 billion at the beginning of 2000. Apple was most often referred to as "beleaguered" during that dark decade, barely rising above a few billion in market cap before Steve Jobs returned to the company in 1996. Before launching the iconic iMac in 1998, however, Steve Jobs made a deal with Microsoft to help Apple weather some tough times while it worked on launching a series of new products and returning to profitability.

That 1997 deal included patent and technology cross-licensing agreements between Apple and Microsoft, Microsoft committing to creating new Mac versions of Office and Internet Explorer for the following five years, and Apple agreeing to install Internet Explorer as the default Web browser on all shipping Macs during that time period. Additionally, Microsoft invested in Apple to the tune of $150 million dollars.

In Apple's 2003 10-K filing with the SEC, the company revealed that Microsoft's $150 million investment bought the company 150,000 shares of Series A nonvoting convertible preferred stock at $1,000 per share. Microsoft had the option after August 5, 2000 to convert those preferred shares, for $8.25 per share, into common stock. In 2000, Microsoft converted a little under half its shares into 9 million shares of common stock. It then converted the remainder in 2001 into another 9.2 million shares.

All told, Microsoft spent a little over $151 million to acquire 18.2 million shares of Apple stock, for roughly $8.31 per share. Microsoft confirmed that it sold all of its AAPL holdings some time ago, and likely did so at a healthy profit—after all, AAPL has traded significantly higher than $8 for many years. But what if Microsoft had held on to that investment just a little longer?

As of approximately noon CDT Thursday, AAPL was trading at $250.99. That translates to a value of $4.57 billion, which would represent a staggering 3,000 percent ROI had Microsoft held on to those 18.2 million shares.

At its recent record peak at the end of April, AAPL was trading even higher, at $272 per share. Had Microsoft cashed out then, it would have had an extra $4.95 billion in its pocket—a nearly 3,200 percent ROI.

Since Steve Ballmer took over as Microsoft's CEO, the company's market cap has dropped to less than half its peak value, currently hovering around $219 billion. Ballmer recently downplayed the significance of the market cap drop by pointing out that Microsoft still earns far more profit that Apple. "I will make more profits and certainly there is no technology company in the planet which is as profitable as we are," Ballmer said earlier today during a press conference in New Delhi. "Stock markets will take care of the rest."

Apple is closing the profit gap as well. For the first quarter of 2010, Microsoft reported profits of $4 billion on $14.5 billion in revenue. Apple made $3 billion on $13.5 billion in revenue in the same period. Apple has made enormous strides in the last decade, earning its place as one of the top technology companies in the world.